The Importance Of Due Diligence In Multifamily Profits-Phase I

Due Diligence Research-Part ITo start off I thought we’d review the most important truisms of multifamily investing.  The best known is: “Buy low, Sell high.”  The second most important is: “The three most important considerations in real estate are 1. Location, 2.) Location, and, 3.) Location.”  OK, heavy duh factor on those two.  Today I want to focus on the third most important truism:

“You get paid most of your profits at the end, but you earn them at the beginning.”

It’s important to know your actual starting point.  Due Diligence research is how you establish that.  Its how you know whether you’re looking at a cash cow or a profit eating alligator.

Competent Due Diligence for investment real estate has three phases:

  • Phase I:  Preliminary Title Report
  • Phase II: Books and Records
  • Phase III: Physical Plant Inspections

Contact Rick Bean at 503.577.1034 or rick@rosecitycre.com for a review of your Due Diligence information…or any of your other real estate investment needs.

PHASE I DUE DILIGENCE: PRELIMINARY TITLE REPORT 

This typically starts a few days after the opening of escrow.  The title company issues a Preliminary Title Report.  This will is a list of all items the title company shows that pertain to the Subject Property.  That includes liens, easements and deed covenant, conditions and restrictions, more typically referred to as CC&R’s.  This is a place where lazy agents do things that drive their E &O (error and omission) Insurance providers crazy.  If there are liens, they must be paid off before title can be transferred.  And there may be items that are appurtenant with the land (run with the land) that any buyer needs to be a ware of.

A case in point:  I was representing a property that had a Skybridge attached to it.  There was no easement agreement defining who had ownership of what parts, who was responsible for maintenance and who was liable.  My Buyer saw it as a poorly maintained eyesore, the Seller saw it as an asset with great long-term potential, the owner of the building it connected to considered it a problem and locked their side to prevent entry.  This is a recipe for long-term litigation.

There were also 4 easements and 1 encroachment noted.  Proper Due Diligence meant verifying where these where so that the Buyer knew before buying whether or not any of these could potentially compromise the value of the asset.  The Preliminary Title Report in the example above also contained an erroneous finding.  When I matched the findings to the list of reported items I noted that an item recorded as an encroachment was actually a note.  In theory if there was a problem the buyer might be able to sue the title company for satisfaction…but I put extra effort to avoid situations for my client where suing is the best options.  An ounce of prevention is worth much more than a pound of cure.

NEXT: Due Diligence, Phase II: Books & Records…check back 07.16.12.

Other articles you may be interested in:

Michael Kapnick: The way investment real estate ought to be done! | Rose City Commercial Real Estate

The Importance of Due Diligence in Multifamily Profits, Phase III: Physical Inspection | Rose City Commercial Real Estate

What You Need to Know about Capitalization Rate | Rose City Commercial Real Estate

 

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